Borrowers fail to refinance despite great market conditions

Nonprofits have long pushed for widening the credit box, while the government has just recently started pushing for it too. And now new research shows that there are still plenty of borrowers that are failing to latch on to programs that can be majorly beneficial to them.

Approximately 20% of households for whom refinancing would be optimal are throwing over ten grand a year away due to their failure to take action.

The National Bureau of Economic Research put out a new study that looked at a large random sample of outstanding U.S. mortgages in December 2010, finding that consumers are significantly failing at using the one answer they need.

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While buying and financing is one of the most important financial decisions a household can make, NBER stated, they are missing the next step: refinancing.

“Despite the large stakes, anecdotal evidence suggests that many households may fail to refinance when they otherwise should. Failing to refinance is puzzling due to the large financial incentives involved. However, certain features of the refinance decision make failing to refinance consistent with recent work in behavioral economics,” the report said.

NBER stated borrowers are road blocked for three distinct reasons:

It is difficult for borrowers to calculate the financial benefit to refinancing due to the very limited experience borrowers have with the complexities of transactions of this type.

The benefits of refinancing are not immediate, but rather accrue over time.

There is high amount of up-front costs, both financial and non-financial, that households must pay in order to complete a refinance, including a re-evaluation of their financial position and the value of their home.

“All of these features provide a psychological basis for why some households may fail to take up large savings,” NBER said.

The study found that the median household would save $160 per month over the remaining life of the loan, and the total present-discounted value of the forgone savings for these 20% of households was approximately $11,500.

“Our results suggest the presence of information barriers regarding the potential benefits and costs of refinancing,” NBER said. “Expanding and developing partnerships with certified housing counseling agencies to offer more targeted and in-depth workshops and counseling surrounding the refinancing decision is a potential direction for policy to alleviate these barriers for the population most in need of financial education.”

This where organizations like NeighborWorks America step in, which has created opportunities for people to improve their lives and strengthen their communities by providing access to homeownership and to safe and affordable rental housing.

According to NeighborWorks America, homeowners working with National Foreclosure Mitigation Counseling program counselors are nearly three times more likely to obtain a money-saving mortgage modification, are nearly twice as likely to get their mortgage back on track without a modification, about 60% less likely to re-default after curing a serious delinquency, and, if necessary, able to complete short sales faster than homeowners who don’t work with housing counselors.

“If there was any lingering doubt about the value of NFMC counseling for homeowners and the broader real estate industry, the research announced today should put those doubts to rest,” said NeighborWorks America acting CEO Chuck Wehrwein.

“A ding on the credit score, a lost down payment, there are multiple reasons we think (housing) demand is down,” Director of the Federal Housing Finance AgencyMel Watt said in an exclusive interview with HousingWire. “It’s a lack of confidence that housing has the same place in the pecking order of the American dream.”

The FHFA recently started a nationwide public campaign that will visit targeted cities with the highest number of in-the-money borrowers who have yet to take advantage of a Home Affordable Refinance Program.

And it does not end there.

Fannie Mae announced on Monday that it is widening the credit box by updating the policy related to the minimum waiting periods following a preforeclosure sale or deed-in-lieu of foreclosure, making it easier for distressed borrowers to jump back into the market sooner.

However, it is important to mention that there are many reasons why a household may sensibly not refinance, like if they plan on moving soon.

“One policy that has been suggested to overcome the need for active household participation would require mortgages to have fixed interest rates that adjust downward automatically when rates decline,” NBER said.

While an automatically-refinancing mortgage contract would be more expensive up-front for all borrowers in equilibrium, NBER explained that it would remove the cross- subsidization in the current mortgage finance system.

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Brena Swanson is formerly the Digital Reporter for HousingWire. Brena joined the HousingWire news team in February 2013, also serving in the roles of Reporter and Content Specialist. Brena graduated from Evangel University in Springfield, Missouri.

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